Singapore Stock Alpha Picks (Feb 2021) - UOB Kay Hian 2021-02-04: Strong Outperformance; Add In GHY Culture, InnoTek; Remove Sunpower, Frencken, Venture Corp


Singapore Stock Alpha Picks (Feb 2021) - Strong Outperformance; Add In GHY Culture, InnoTek; Remove Sunpower, Frencken, Venture Corp

Strong outperformance in Jan 21.

Adding GHY Culture and InnoTek.

  • We add newly-initiated GHY Culture & Media (SGX:XJB) to our portfolio given its sizeable production pipeline and attractive valuation. See initiation coverage report: GHY Culture & Media - UOB Kay Hian 2021-01-19: A Content Champion In The Making. Trading at 12.3x 2021F P/E (vs peers’ 18.5x 2021F PE) and only up 9.1% from its listing price of S$0.66, the high-quality drama and concert production company is underappreciated by the market, in our view.
  • For InnoTek (SGX:M14), we believe the group is set to benefit from China’s recovery in auto sales which historically accounts for 30% of its annual revenue. Furthermore, InnoTek's share price trades at an undemanding valuation of 7.8x 2021F P/E (3.8x ex cash), a laggard compared to the sector average of 13.4x 2021F PE.

Removing Sunpower, Frencken and Venture.

Singapore Stock Alpha Picks For Feb 2021

* Alpha pick denotes a timeframe of 1-3 months and not UOBKH’s usual 12-month investment horizon for stock recommendation.

GHY Culture & Media (SGX:XJB) – BUY (Lucas Teng, John Cheong)

  • High-quality drama and concert production company; underappreciated by the market. GHY Culture & Media is a media company which focuses on the production of dramas, films and concerts. Its drama series have achieved commercial success in China, attaining high viewership ratings. GHY Culture & Media was a recent listing in Dec 20, and has only risen 9% from its listing price of S$0.66. Wider analyst coverage could also help to rerate the counter.
  • Sizeable production pipeline guided by notable China director. GHY Culture & Media has up to 23 drama or film projects for production and release in the pipeline, which underpin its near-term EPS growth. The group is led by Mr Guo Jingyu, a notable producer, director and scriptwriter in China with more than 25 years of experience.
  • Looking forward to the return of concerts. GHY Culture & Media has been granted the rights to undertake the production of concerts for well-known Taiwan singer-songwriter Jay Chou in Singapore, Malaysia, Australia, Thailand, Japan and China (excluding Hong Kong and Macau). Jay Chou is ranked first among all China singers in accumulated ticket sales for concerts in China from 2017-19. With the rollout of vaccinations, large-scale mass events are likely to see gradual resumption in 2H21.
  • Valuations still attractive. GHY Culture's share price currently trades at 12.3x 2021F P/E, below peers’ average of 18.5x 2021F P/E.
  • See GHY Culture & Media Share Price; GHY Culture & Media Target Price; GHY Culture & Media Analyst Reports; GHY Culture & Media Dividend History; GHY Culture & Media Announcements; GHY Culture & Media Latest News.

GHY Culture's share price catalysts

InnoTek (SGX:M14) – BUY (John Cheong)

  • Undemanding valuation. Trading at 7.8x 2021F P/E (3.8x ex cash P/E) and 0.8x P/B, we opine this is unjustified as InnoTek has the third-best net margins and net cash position among similar Singapore peers. Coupled with the second lowest P/B ratio, we believe InnoTek should be trading at a valuation nearer or on a par with its Singapore peers of 13.4x 2021F P/E and 2.4x P/B.
  • Set to benefit from recovery in China’s automobile sales. China has successfully contained the COVID-19 outbreak and eased most of its social distancing measures. This has led to a surge in passenger vehicle (PV) sales back to pre-COVID-19 levels. InnoTek, which has large exposure to China’s automobile market (historically accounted for 30% of annual revenue), is set to benefit from 2H20.
  • New CEO’s successful restructuring initiatives and strong major shareholder backing. InnoTek’s new CEO and non-independent Director Lou Yiliang (who joined at end-15) implemented several restructuring initiatives to boost profitability, including an incentive scheme which rewards employees based on units produced per day and production yield. As a result, InnoTek managed to turn from a net annual loss of S$16.3m in 2015 to decade-high annual net profits of S$20.2m/S$16.7m in 2018/19 respectively.
  • Meanwhile, its gross margins have also increased from 6.5% in 2015 to 21.8% in 2019. As such, InnoTek has become more resilient during economic downturns due to the initiatives. The track record of its major shareholder, the Chandaria family which is involved in the founding of Venture Corp (SGX:V03), has been underappreciated by the market. Mr Neal Chandaria has been the Chairman since 2017 to date, which are InnoTek’s most profitable years.
  • Balance sheet loaded with cash. As of end-1H20, InnoTek had a net cash position of S$72.9m, up S$37.9m (+108%) from end-15, forming 48% of its current market capitalisation.
  • See InnoTek Share Price; InnoTek Target Price; InnoTek Analyst Reports; InnoTek Dividend History; InnoTek Announcements; InnoTek Latest News.

InnoTek's share price catalysts

  • Events: Better-than-expected results and higher dividends.
  • Timeline: 2-3 months.

First Resources (SGX:EB5) – BUY (Leow Huey Chuen & Jacquelyn Yow)

  • Reiterate BUY. First Resources remains our preferred pick for pure palm oil play. We expect its 2021 earnings to increase by 16% y-o-y on the back of higher ASP. We also like First Resources for its:
    1. young estate profile;
    2. better-than-peers’ estate operational performance;
    3. lower cost of production; and
    4. stable downstream margin.
  • Better-than-peers’ FFB production growth. We expect First Resources’ 2021 fresh fruit bunch (FFB) production growth to be higher than peers at 5% y-o-y. The higher FFB production would come mainly from:
    1. stable production growth from the Riau region; and
    2. production recovery at its Kalimantan estates which had suffered due to the unfavourable weather in 2019.
  • Further to that, most of First Resources’ Kalimantan estates are moving into prime production age (contributing 38% of total planted area and 29% of total production).
  • Better ASP. As CPO price has been above RM3,000/tonne since Oct 20 coupled with better production, we are expecting higher 2021 earnings for First Resources. Based on our 2021 earnings forecast, we are expecting core net profit to increase by 16% y-o-y, buoyed by higher ASP; and better-than-peers FFB production growth and oil extraction rate. For every 10% increase in CPO prices, First Resources’ core net profit will increase by 29%.
  • Stable downstream margin. Downstream margin is expected to be good in the near term. With the sharp increase in CPO price, the refined palm oil levy is lower than the crude palm oil levy, resulting in a relatively good processing margin. On the biodiesel side, management has stated that delivery of the contracted amount by Pertamina is on track with a high realisation rate. First Resources had received 2021 biodiesel allocation of 259,882 kiloliters (kl) which is close to its 2020 allocation of 283,281kl.
  • See First Resources Share Price; First Resources Target Price; First Resources Analyst Reports; First Resources Dividend History; First Resources Announcements; First Resources Latest News.

First Resources's share price catalysts

Food Empire (SGX:F03) – BUY (Joohijit Kaur & Clement Ho)

  • Daily share buyback underlines confidence in business outlook. Since the start of the buyback mandate on 23 Apr 20, a total of 3,333,600 shares has been purchased, forming approximately 0.6% of its outstanding shares. This was mainly carried out in 4Q20 and Jan 21 where Food Empire bought back a total of around 3.0m shares for a consideration of approximately S$2.0m, potentially signalling a strong set of results for 4Q20 and its confidence for business outlook in 2021.
  • Compelling valuation. Food Empire trades at an undemanding valuation of 11.4x 2021F P/E, a significant discount to peers’ average of approximately 20x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe.
  • Resilient product offering and strong brand equity. Given the low price, relatively inelastic and consumer-staple nature of its products, Food Empire is likely to be more resilient and sheltered from an economic slowdown, in our view. Additionally, we highlight that in spite of the weaker rouble against the US dollar, the group has managed to mitigate some of the adverse impact on bottom line through ASP hikes and cost management.
  • We are encouraged by Food Empire’s core earnings (ex forex) growth in 9M20 at 11.2% y-o-y despite stringent lockdowns in 2Q20. We believe this is a testament to its strong brand equity in its core markets that has been developed over many years.
  • See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.

Food Empire's share price catalysts

  • Events: Stronger-than-expected recovery in volume consumption and improvement in operating leverage.
  • Timeline: 3-6 months.

Singapore Airlines (SGX:C6L) – SELL (Ajith K)

  • The upcoming 3QFY21 results on 4 Feb 21 will not be a stock price catalyst as Singapore Airlines (SIA) is still expected to be in the red. In addition, traffic recovery assumptions would likely be scaled back given the slower rate of vaccinations in Singapore and globally. This in turn should lead to continued cash burn for the next three quarters.
  • SIA's share price has run ahead of foreseeable fundamentals. We believe that the euphoria following the announcement of vaccines is unjustified and opine that SIA is overvalued. For a start, we had already imputed a recovery in traffic for FY22 and had pegged fair value at 0.9x to FY22’s book value. While there is a great deal of uncertainty on the pace of traffic and load factor recovery, we believe pre-COVID-19 level FY20 EBITDA offers a fair hurdle in terms of earnings prospects for FY21. With that, we have valued SIA on a pre-COVID-19 and post-COVID-19 EV/EBITDA multiple. The enterprise value factors in:
    1. S$8.8b in rights and mandatory convertible bonds issue; and
    2. new convertible debt of S$850m and exercise of S$500m from a S$10b medium-term notes (MTN).
  • We believe that long-term ROE is likely to be severely crimped by higher interest payments, especially if SIA uses part of its S$10b MTN to fund capex.
  • See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

SIA's share price catalysts

  • Events: Global vaccination by 3Q21.
  • Timeline: 3-6 months.

OCBC (SGX:O39) – BUY (Jonathan Koh)

  • New CEO, but unchanged focus to expand in Greater Bay Area. Ms Helen Wong is a competent leader with a strong track record, having led HSBC’s Greater China operations, which is the largest profit centre of HSBC. We expect her to focus on expansion in the Greater Bay Area, Sustainable Finance and cross-selling. We look forward to OCBC improving its dividend policy, and with more intensified focus on technology and digitalisation.
  • Exposure to moratorium loans significantly reduced. OCBC has reduced total loans under moratorium from S$23.7b at end-September to S$13.6b at end-October after adjusting for the end of Malaysia's relief programme on 30 Sep 20. As a percentage of group loans, the exposure was reduced from 9% to 5%. The proportion of moratorium loans secured with collateral, such as residential, commercial and industrial properties, expanded from 91% to 93%.
  • Smooth expiry of moratorium loans in Malaysia. The bulk of the reduction came from Malaysia where moratorium loans were reduced from S$11.8b to S$1.7b, of which businesses (mostly modified repayment) and individuals requesting further relief accounted for S$1.0b and S$0.7b respectively. Within Malaysia, the exposure to moratorium loans has contracted from 53% to 8% of country loans. From 1 Oct 20, OCBC provides targeted relief extension and loan repayment flexibility only on an application and approval basis (no longer blanket and automatic inclusion).
  • Guarded optimism. OCBC has maintained guidance for peak gross NPL ratio at 2.5-3.5% and aggregate credit costs at 100-130bp for the 2-year period during 2020-21. Management is optimistic that the eventual outcome could gravitate toward the bottom-end of the abovementioned ranges at 2.5% and 100bp, although management cautioned against uncertainties from COVID-19 outbreaks in regional countries.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

OCBC's share price catalysts

  • Events:
    1. OCBC’s dividend yield improving from 4.8% for 2021 to 5.4% for 2022; and
    2. OCBC Wing Hang could complete implementation of an internal ratings-based approach to compute risk-weighted assets (RWA) by end 1H21.
  • Timeline: 6-12 months.

SingTel (SGX:Z74) – BUY (Chong Lee Len)

  • Entering digital banking. On 4 Dec 20, the Grab-SingTel (60:40) consortium secured a digital full banking (DFB) licence from the Monetary Authority of Singapore (MAS). We view this positively as it will allow SingTel to stack this new business segment to help drive future earnings growth and diversify away from its key telco mature assets. In the near term, we see little earnings impact and assume the venture will take 4-5 years to breakeven. In addition, an initial S$600m equity injection is manageable (raising FY21 net debt/EBITDA from 1.9x to 2x) as we expect SingTel to maintain its dividend mandate. We value the digital banking licence win at 4 cents (or 2% of market capitalisation). This is based on 1x paid-up capital, or a 30% discount to large bank’s mean P/B of 1.45x.
  • Share price appears to have bottomed in Nov 20 when it traded at -1SD below its 5-year mean EV/EBITDA. At our target price of S$2.84, SingTel trades at 12.1x FY22F EV/EBITDA (5-year mean EV/EBITDA).
  • Recent 1HFY21 results were weak with core net profit declining 36% y-o-y to S$837m due to a 27% y-o-y decline in National Broadband Network (NBN) migration revenue and margin compression in its Australia consumer segment and higher net interest expense. India and Africa operations were stronger y-o-y.
  • Dividend above expectations. SingTel declared an interim net dividend of 5.1 cents/share. This is based on 100% net profit payout and above our expectations of 7.5 cents/share (50% payout) for the year.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

SingTel's share price catalysts

  • Events: Rolling out of digital banking licence plans in 1H21, reopening of economies towards end-20/early-21, faster-than-expected recovery in Optus’ consumer and enterprise businesses.
  • Timeline: 3-6 months.

BRC Asia (SGX:BEC) – BUY (Lucas Teng)

  • Robust margins set to continue. BRC Asia's gross margin of 12.2% in 4QFY20 held up well (+3.3 ppt y-o-y) as the group continues to benefit from lower costs for bulk raw material purchases since its acquisition of Lee Metal in 2017. BRC Asia noted that construction activities have reached economically-viable levels from the second half of Aug 20.
  • Building back up in 2021. We expect construction demand to recover to some extent in 2021, supported by public residential developments and upgrading works, developments at the Jurong Lake District and Cross Island MRT Line. Current construction activities are at 70% of pre-COVID-19 levels.
  • Building up for a strong rebound. We see earnings rebounding strongly in FY21, up 88% y-o-y. BRC Asia's share price currently trades at 9.8x FY21F earnings, below its long-term average (excluding outliers).
  • See BRC Asia Share Price; BRC Asia Target Price; BRC Asia Analyst Reports; BRC Asia Dividend History; BRC Asia Announcements; BRC Asia Latest News.

BRC Asia's share price catalysts

  • Events: Faster-than-expected recovery in construction activities, more public housing projects.
  • Timeline: 3-6 months.

Ascendas REIT (SGX:A17U) – BUY (Jonathan Koh)

  • Portfolio occupancy was stable at 91.7% as of end-Dec 20. Singapore occupancy edged lower by 0.4ppt q-o-q to 88.4% due to non-renewal of lease for 11 Changi North Way. Occupancies in Australia and the UK were stable at 97.4% and 97.5% respectively. Occupancy for the US improved 0.9ppt to 92.9% due to the two newly-acquired office properties in San Francisco with occupancy of 100%.
  • Recovery to positive reversion driven by business parks in the US. Ascendas REIT's Rental reversion swung from negative 2.3% in 3Q20 to positive 2.5% in 4Q20. The recovery was supported by strong positive rental reversion of 18.8% for its US portfolio, driven by business park properties in Portland. On a full-year basis, rental reversion was positive at 3.8% in 2020. The government sector accounted for 22.7% of new demand by gross rental income. Management has guided positive low single-digit rental reversion for full-year 2021 due to current market uncertainties.
  • Further expansion in Australia and the US. Ascendas REIT completed the acquisition of an 8-storey suburban office building at 254 Wellington Road in Melbourne for S$100.6m in Sep 20. Nissan has leased 65% of the office space to serve as its head office and training centre for 10 years. The suburban office provides NPI yield of 5.8%.
  • Ascendas REIT has also acquired two suburban office properties at Macquarie Park, Sydney MQX4 (completion: mid-22) and 1-5 Thomas Holt Drive (completion: Jan 21) for total consideration of S$445m. The two suburban office properties provide NPI yields of 6.1% and 5.9% respectively. The acquisition of two office properties in San Francisco - 505 Brannan Street and 510 Townsend Street - for S$768m and NPI yield of 4.9% was completed in Nov 20.
  • See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

Ascendas REIT's share price catalysts

Yangzijiang Shipbuilding (SGX:BS6) – BUY (Adrian Loh)

  • Orderbook wins in 2020 were solid, in our view. Yangzijiang Shipbuilding outperformed our expectations with US$1.8b worth of new orders in 2020 in the face of a tough year given the COVID-19 pandemic. Importantly, the company appears to have expanded its market share in China given that almost all of its orders in 2020 were from Chinese clients compared to the past which saw a more even distribution of orders originating from clients in Europe, the US and Asia. We expect the company to build on this momentum in 2021 and conservatively forecast a similar level of order wins of US$1.8b.
  • We also highlight commentary from management that global new ship-building orders declined by about 50% in 9M20 in the face of a depressed market, which makes the company’s order wins in 2020 all the more compelling.
  • Expecting solid 4Q results. Yangzijiang Shipbuilding’s 4Q20 results should be strong given that the company’s new order wins peaked during the quarter at nearly US$1b. In addition, results may be bolstered by the potential of a tax write-back at the end of 2020 as its new shipyard may qualify as a “New High Tech Enterprise”, thus attracting a lower tax rate of 15% vs the current 25% tax rate that Yangzijiang Shipbuilding has provisioned for. This would equate to a tax write-back of around RMB100m which we have not factored into our current forecasts.
  • We believe that YZJ remains a compelling stock for this year as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 2.7x and 0.52x respectively, a PEG ratio of 0.69 and net cash of S$0.22/share (or 23% of its current share price). In addition, if we add its net cash position to the current portion of its debt investments of RMB13.6b as at end-3Q20, this would be equivalent to its current market capitalisation of S$3.5b. This implies that investors are essentially getting its shipbuilding business for free.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Yangzijiang's share price catalysts

  • Events: New order wins; better returns on its debt investments portfolio; strong 3Q results.
  • Timeline: 3-6 months.

Thai Beverage (SGX:Y92) – BUY (Lucas Teng)

  • Alcohol volumes remain at a high. According to the Office of Industrial Economics, white spirits domestic sales amounted to 55m litres (-0.5% y-o-y) in 1QFY21, showing a resilient level of volumes. We expect Thai Beverage to show similar levels of spirits volume sales in its upcoming 1QFY21 business update.
  • Potential IPO on the cards? According to a recent new report from Reuters, Thai Beverage has revived plans to list its regional beer assets. This could be done through a Singapore IPO that could raise US$2b. Listing could be as early as 1H21 but could spill into 2H21.
  • Solid cost control. The group has taken steps to control costs and adapt to the pandemic, which largely protected its profitability. SG&A expense-to-revenue ratio fell to 15.9% in FY20 (-1.1ppt y-o-y) as the group reduced advertising and promotional expenses. Advertising and promotions (A&P) spending in areas such as premise activities in bars and concerts will likely continue to be muted.
  • Valuations still attractive. Thai Beverage's share price currently trades at 18x FY21F P/E, still below its 5-year mean P/E of 20.4x.
  • See Thai Beverage Share Price; Thai Beverage Target Price; Thai Beverage Analyst Reports; Thai Beverage Dividend History; Thai Beverage Announcements; Thai Beverage Latest News.

Thai Beverage's share price catalysts

  • Events: Potential listing, vaccine administration news.
  • Timeline: 3-6 months.

Far East Hospitality Trust (SGX:Q5T) – BUY (Jonathan Koh)

Far East Hospitality Trust's share price catalysts

  • Event:
    • Downside protection from fixed rents embedded in master leases with sponsor FEO, which owns 61% of Far East Hospitality Trust; and
    • recovery in occupancy, average daily rate and RevPAR in 2022.
  • Timeline: 6-12 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.080 SAME 1.080